Lehman Brothers collapse: was capitalism to blame?

The near-meltdown in 2008 was a failure of contemporary economic models’ understanding of the role and functioning of financial markets

Until six days before Lehman Brothers collapsed five years ago, the ratings agency Standard & Poor’s maintained the firm’s investment-grade rating of “A”. Moody’s waited even longer, downgrading Lehman one business day before it collapsed. How could reputable ratings agencies – and investment banks – misjudge things so badly?

Regulators, bankers, and rating agencies bear much of the blame for the crisis. But the near-meltdown was not so much a failure of capitalism as it was a failure of contemporary economic models’ understanding of the role and functioning of financial markets – and, more broadly, instability – in capitalist economies.

These models provided the supposedly scientific underpinning for policy decisions and financial innovations that made the worst crisis since the Great Depression much more likely, if not inevitable. After Lehman’s collapse, former Federal Reserve chairman Alan Greenspan testified before the US Congress that he had “found a flaw” in the ideology that self-interest would protect society from the financial system’s excesses. But the damage had already been done.